Your Loan Matures in 18 Months. Now What?
Your commercial real estate loan matures in 18 months. Now what?
Unlike a residential mortgage, most commercial loans don’t give me 30 years to pay them off. I’m typically working with a five-year term, which means at some point I have to refinance, sell, recapitalize, or figure out another way to handle that remaining balance.
And I’m actually going through this process on one of my own deals right now.
In this video, I’m breaking down exactly how I approach a commercial loan maturity, why I start planning 18 months before the loan comes due, and the numbers I’m paying the most attention to when it’s time to refinance.
We’ll cover:
How commercial loan maturities actually work
Why your loan term and amortization are two completely different things
How I calculate whether a property can support a new loan
Why NOI and DSCR can make or break your refinance
The different options I’m running in parallel on my own deal
What I’m doing 24, 18, 12, 6, and 3 months before maturity
The biggest mistake you can make isn’t having a loan come due.
It’s waiting until 90 days before maturity to figure out what you’re going to do.
Key Takeaways:
Start planning for your loan maturity 18 months out. That gives you enough time to evaluate your options, negotiate with lenders, and strengthen the property before you’re under pressure.
Your loan term is not your amortization. A commercial loan might amortize over 20–25 years but still balloon after five years, leaving a significant balance to refinance.
DSCR is one of the most important numbers in a refinance. Your payment history helps, but the property still needs enough NOI to support the new debt at today’s rates.
Higher interest rates can completely change the refinance. Even if your loan balance has decreased, a higher rate can significantly increase debt service and create an NOI gap.
Refinancing shouldn’t be your only option. Run multiple strategies in parallel: competing lenders, bringing in partner capital, recapitalizing, extending or modifying the existing loan, or potentially selling all or part of the property.
You can actively improve your refinance position. Increasing rents, filling vacancies, signing leases, and reducing operating expenses can increase NOI and help the property meet the lender’s requirements.
Work backward from maturity. Review your loan documents 24 months out, model the refinance and NOI gap at 18 months, improve operations and contact lenders around 12 months, choose your path by six months, and aim to be executing—not deciding—by 90 days out.
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Tyler Cauble 0:00
So your loan matures in 18 months. What do you do now? Well, in commercial real estate, you have a very different approach to loans than you do in the residential world. Every five years, typically, your loan is going to come due, regardless of what's going on in the market, regardless of how the asset is performing. Typically, you're on a five-year time horizon, so how do you handle that? So, if we're comparing this to the residential world, which I know a lot of us are more familiar with, there's a pretty big structural difference between the types of loans that you're going to be looking at. And in the residential world, you're typically going for a 30-year term with a 30-year amortization, which means that if you pay that note every month for 360 months, by the time you pay the 360th month, you will have paid off that note. So over 30 years, you will own that house free and clear. However, in commercial, in the example I've got here is a 25-year amortization. Typically, what you'll see is a 20-year amortization, but 25 can also be common depending on the type of financing that you're going for. If you're owner occupied, etc. you might see a 25-year amortization, but a five-year term, which means that they are going to amortize the loan over 25 years, but they are going to balloon it in five. So it is coming due in five years, regardless of how the loan is performing. So what I tell everybody because I get the question all the time. Well, Tyler, shouldn't I be concerned? Like, I don't want to have to deal with a commercial loan every five years, guys. Five years is a long time. It is a long, long time. And the way that I like to look at these is, hey, just start working on it 18 months before you need to. Don't wait until the last minute to figure it out. 18 months will give you plenty of time to figure something out, regardless of how the market is performing. And I know what the balloons sound like, right? I mean, if you've never done a commercial loan before, it sounds like, hey, I owe $2 million in five years, right? It's just going to come due. I'm going to owe $2 million to the bank. What if I cannot refinance the building, right? You know, there's that fear that's sitting underneath every single deal, and here's the thing: unless you royally screw up, I mean, guys, you know, if you buy it right on the front end, chances are good you're going to be able to refinance it on the back end, especially if you're increasing that net operating income, which we will be talking about today. And then, you know, hey, why trade fixed loans for a five-year clock? Well, one, you can't get fixed loans for 30 years in commercial real estate unless you're going with, you know, a Class AA apartment complex and you're getting a life insurance company to put the debt on it, right? Then you might actually be able to get a 30-year term because they don't want their money back for a while, they want to just park it and forget about it. But 99 times out of 100 commercial loans, it doesn't matter who you are, doesn't matter what size the project is. Typically, every five years, and so you know what that comes down to is, like in my experience, what I've seen is there's just a knowledge gap. That's that's the only thing that creates the fear because five years is plenty of time for you to turn a project around to the point where you can easily refinance it or pay it off, and we'll talk about more of that today. So here's the thing: the term is not the amortization, right? And let's let's look at this from a $2 million loan at 4% which you could have gotten, you know, five years ago, right? Unfortunately, we're not seeing a whole lot of that these days. 25 year amortization, five-year term. That means that your payment every year would be about $126,000, right? So over a five-year period, you're going to pay down roughly $257,000 on that note. All right, so 87% of your original original note is still outstanding after five years. You have to refinance 87% of that original debt.
Tyler Cauble 3:53
You're not paying it down a whole lot, especially on a 25 year amp. You'll pay down more on a 20-year amortization, obviously, but you're just not going to cash flow as much. So here's the thing: the the banks don't want to take your property back, right? They want you to continue operating it. They want you to be successful. They are not in the business of owning real estate, and they don't want to cross over into that lane. They want you to be the owner, and they want to collect a debt payment every single month. That's it. That's all they want, but they do have to reprice it. And so what I have found is that the earlier that you start working with your lender, if you want to refinance with that lender specifically, the better of an opportunity you have to stay with them. Now some banks will allow you to just refinance with them, put a new note on it, and then you're golden. Sometimes banks just say, "Hey, we'd like to turn it over and get into another one. So at that point, you'll have to go out and you'll start talking to other banks. So here's what repricing means from a banking standpoint, right? They're just going for a new loan, right? It's a new rate, it's a new test. It doesn't mean that you are renewing. The existing loan. This is a totally new loan, as if you are bringing the asset to them for the first time again. Now, obviously, the bank is going to have some familiarity with it. Hopefully, by this point, you will have 60 on-time consecutive mortgage payments that they will be able to look at as loan history for you. So, they're actually going to be slightly more motivated to give you the the the new loan because they know that you have been successfully paying it for this time. They're they're not asking for the money back, right? They're just asking to write the loan again at today's numbers. And when you see interest rates go up like what we have, that can dramatically change a deal, right? Now I know that I just talked about your payment history and that being helpful, but it is relatively irrelevant when you are looking at it. Just because you have made 60 perfect payments doesn't mean that they're automatically going to give you a loan. It helps. I mean, that will be a huge determining factor when your lender has to go to loan committee and pitch the the bank on why they should lend to you again. That will certainly help. However, you still have to hit the minimum debt service coverage ratio and the other covenants that the bank is going to have. So, just because you have 60 on-time rental payments doesn't mean that they're going to say, okay, well, that's fine. If we refinance it, you know, just the existing debt. If we don't even take anything out at today's new rate, we're looking at a 1.1 times debt service coverage ratio, but the bank has a standard 1.2 that they're not just going to automatically give you the loan because you had 60 on-time rental payments, right? But that may convince them if you're at 1.18 and there's a clear path for you to raise a couple of rents or decrease operating expenses to get it to a 1.2 in the next 12 months, they might be willing to work with you on that, all right, and that's good news because these are numbers that you can control on your deal that will help the underwriting for this investment with the bank. All right, you can increase the net operating income by putting new tenants in there. You can decrease your operating expenses by running things more efficiently, which means that your net operating income is higher. Okay, so here's really the number that ends up deciding it. Like I said, it is your debt service coverage ratio all day. This is the most important number when you are looking at your refinance. All right, because banks want to make sure that you are making enough money to not only pay them their debt service, but that you're making money to justify continuing to work on the property, right?
Tyler Cauble 7:27
Because like if you look at a 1.2 times debt service coverage ratio for every dollar in debt, they want you to be bringing in $1.20 NOI. The bank is kind of looking out for you. They want to make sure that you're making enough net profit to make it worth your time, because they know if it's you know if it's 1.05 if you're only making you know five cents out of every dollar that you're giving to the bank and and debt service it's not really worth your time you're kind of going to be motivated to just give it to the bank and walk away at some point if it becomes too difficult right so if we're looking at at the $1.74 million balance that we had remaining on this $2 million note that we were just talking about, right? We're going from 4% to seven and a half percent interest. All right, your new debt service is 154,000 a year. That is a 22% jump. If your NOI is 175,000 a year, that's a 1.13 times debt service coverage ratio. So you're short by about $18,000, which you know a 1.2 times debt service coverage ratio is about $193,000 a year. All right, so you're short if that's your your NOI. But if your NOI is $200,000, that's a 1.29 times debt service coverage ratio. You're good to go. I mean that that's pretty much all that it takes, right? Most of these banks, your current lender is going to look at this. Every bank that's going to be looking at giving you a new loan is going to be doing this. So the gap is really measured by the net operating income, not necessarily the payments that you are making, because if you if you can cover the payments. They don't care, right? If the deal is strong enough, you have five years starting five years ago to increase that net operating income and make the deal healthy, make it strong, and make it work. All right. So five years is a long time. Now here's the thing: when you're going through this refinancing process, you don't pick one solution. You don't think. Okay, well, the only option for me is to just go refinance this debt, and we're done. There are multiple things that you can consider that you can do in this time period that are worth running in tandem, because you don't like you need to exhaust all of your options, right? And I feel like when you have more options. You have more power. You have more confidence that you can pull it off. It's just I don't know. Maybe that's just me. But it's a little bit of reassurance. All right. So refinancing shouldn't be the plan. It shouldn't be the only plan, right? It's just one door, right? Most owners only open that one. That is the only path. They typically decide to take is okay. Well, I have debt coming due. Let's just refinance. Some get forced into a sale because they're not able to refinance. But a sale should be an option 18 months out, right? I like this 18 month period before the loan comes due, and I'm working on a deal right now. We've got to refinance refinance a note. It comes due two weeks from now, and a year after that. All right. So next September, right? This this loan comes due. We're already working on it. We've been talking to banks for several months at this point about getting this deal refinanced because I don't like to leave it up to chance. I'd rather refinance six months early than to wait to the wire. All right, so open every door possible at that 18 month mark. Okay, work them in parallel, and then close or choose your option at six months remaining, not 90 days. All right, I promise you, you're going to sleep a lot better, and like I said, those parallel tracks are going to create your leverage. Right, no lender is your only option. No partner is your only option. You have multiple different paths that you can take. So let's dive into what those are. So here's the four doors that I am running right now on that deal I just told you guys about. Competing lenders, number one, right? Multiple term sheets in parallel, including our existing lender. Okay, so our existing lender, we're talking to them.
Tyler Cauble 11:26
I've also got, I think, at least three other banks that we're talking to right now about refinancing it. It's going to come down to whoever's going to give us the best term sheet, and I still have another year to figure this out. So I have time to sit here and negotiate. Think about how powerful that is. I have at least nine months before it becomes very uncomfortable. So let's say at least six months comfortably, where I can negotiate as much as I want with these lenders to get the best deal possible. Imagine if you had that type of time going into a deal on the front end. Unfortunately, we typically don't, right? Because we're we're under a timeline to get the deal closed. But now you actually have time to really negotiate better terms on your loan. We also have the option of a partner capital paydown, so that lower loan to value changes the rate that we get quoted on everything else. So if we look at it and we say, "Hey guys, you know what? Let's put some more money into this one. Like we've made some decent money over it over the past five years. If we all put in $100,000, we can pay the note down by 300 grand. All right, and now that gives us a lower loan to value, which means that we have more negotiating leverage with the amount of equity that we have in this. The bank has less risk in the deal, and our debt service is also lower, so it that'll increase the strength of the deal in every single way. Now you could also maybe that's not possible. Maybe not every partner has enough money to do it. You could also do an internal recapitalization, right? Where you retire the debt, you get a fresh basis, and you get liquidity for partners that went out. There's different ways for you to structure this, but the way that we're looking at it is bringing in a. I have three two partners right now, so it's there's three of us. We're looking at bringing in a fourth partner, whose buy-in would be to pay down 100 of the existing debt. Then we have a fourth partner. We've already created substantial amount of value in this property. Now we can go back to a bank. Like we don't have to worry about it. Now we can, you know, put debt on it whenever we feel like it, and that fourth partner it works out for them pretty well too, because we're retiring this debt when we go out and we get a new loan. Either we're going to distribute that to all the partners, everybody gets a portion of of the proceeds there, or we just use that for construction, right? So works out pretty well for everybody either way. And then of course you could do an extension or modification of your existing note. So typically your loan is going to have some sort of terms in there for extending or modifying the note. Now not every loan is going to have this. It depends on what you negotiate on the front end. Depends on the type of lender that you're working with. But typically, if you're going with a local or regional lender, you might have the option to extend your loan for another 12 months. You know, for you know a point on the refinance or whatever that is. You could also start talking to your lender today about what that might look like. You may or may not have that in your loan documents, and even if you don't, call your lender, ask them if they would consider extending the note for another 12 months or six months or whatever it is. All right. So if we're looking at the recapitalization, it solves several problems at once, which is why it's I think it's the most serious one that we're considering right now. I'm actually like, of course, I'm running the refinance route, right? Of course, we're looking at even possibly selling some of the the pieces of this property. So the I mean, which that's what we're doing at Peerless Mill. We're selling one of the buildings because we've got 29 of them. We don't need all 29, and we've got one that's kind of set aside on the property.
Tyler Cauble 14:59
That we could sell, pay down some of the debt, return some of the capital to our partnership, and then spend some more money fixing up the next phase. Makes a lot of sense for us to be able to do that. So then it makes the refinance that much easier. All right, but the recapitalization door solves three problems at once. We retire the debt, right? They're coming in. The the new partners coming in, they're paying down the existing debt. They get a current basis, right? And then there's liquidity for the partners who want it. Now, in our specific situation, there won't be liquidity for partners who want it because we're just not doing it that way. We're reinvesting everything back into the property, but that is a potential for you if that's a path that you want to take. Now you don't have to sell the whole thing. Kind of like I just said with Peerless Mill, we're we're selling one of the 29 buildings. You could also have a partner that sells their partnership, or I mean, there's so many different ways for you to do it. What I want you to understand, and like the biggest takeaway from from this, is that you don't have just one option. There are so many options on the table, especially if you have a healthy deal and you are giving yourself enough time so that you're not running up against the clock. That's why I love the 18 month period. That's when you should absolutely start working on everything there. So if we're looking at this 18 month timeline, each of these is a calendar item, right? Put this in your calendar right now as a reminder. 24 months. Pull the note. Read the extension language. This is 24 months from the day that your loan matures. Okay. At 18 months, model the payment at today's rate. Go find the net operating income gap. Are there any leases that you can get signed before you have to refin. That will help boost your NOI. All right, 12 months out operational work. You're you're doing everything, trying to find that new tenant, decreasing your operating expenses, or putting together a new plan for what it's going to look like, so that your lender feels good about where you are. And then you're calling lenders in parallel. All right, you're working on that refinance. Six months out, you're choosing which door you're going through, and then 90 days out, you're done. Right, you're executing, you're finalizing the the loan, you're going to closing, and it's done. All right, and it can go badly in any of these ways. All right, so make sure that you are just getting ahead of it, so that you don't have to deal with the stress. You don't have to deal with it. Like the five-year term on commercial notes is plenty of time to deal with, if you are taking it into account that you should be working on it earlier and not procrastinating this kind of stuff, right? So the date is not the problem. Making sure that you got a plan and that you know how to approach this is all right. So I dropped a question in in the in the comments earlier. I want to know if you guys have a loan that is maturing. How many options do you have open right now? What are you working on? Let me know in the comments. All right. Let's see what we've got going on here. Hunter saying, "Yo, good morning, good morning, Hunter. Good to see you guys. Ted is saying, "Good morning. I refinanced my house six years ago at 2.9% Took the money and paid cash for one of my commercial properties. Is is this a smart move, or am I missing something? Ted, that's a great move. I mean, obviously, if you've got a commercial property in cash, I would say probably a good opportunity for you to go and refinance that, put some debt onto it, even if it's only 50% debt, and then go leverage that out. The way that I look at utilizing debt, I don't want to own any of my commercial properties in cash because that means that I am not maximizing every single dollar. Now you don't always have to do that. Maybe you sleep better at night by not doing that.
Tyler Cauble 18:37
But here's the thing: if if debt is at seven and a half percent, and I know I'm getting 20% annualized cash on cash returns on my deals. I'm losing 13% on my cash by not going out and finding the next deal. So highly motivating to get out there and find the next opportunity. Jason is saying hello, sir. Jason, what's going on, man? He's one of our students in the Accelerator Mastermind, so he's wanting to look at your commercial or residential deals. So, if you need help with them or you want to do some JVing, reach out to Jason. Jason, appreciate you always being here, man. Good to see you. All right, guys, that is all we have for today's office hours. Thank you for joining us live and dropping your questions in. If you have any other questions on refinancing, leave those in the comments below. I'll respond to every single one. But make sure next time you are working on a commercial real estate loan, you get started on the refinance or the sell or the recapitalization, whatever direction you decide to take. 18 months before loan maturity, you will definitely be thanking yourselves. Appreciate you guys. We'll see you in the next one. This episode of the Commercial Real Estate Investor Podcast is brought to you by my CRE Accelerator Mastermind, where you'll get access to my step-by-step investment blueprint, essentially a library of resources on how to invest. Commercial real estate. You'll get connected to a supportive community of other commercial real estate investors that are doing projects just like you. You'll get personalized coaching and feedback from me every step of the way. Go to www.crecentral.com to learn more.